Issues revisit months-old low yields

30-year bond bounces after auction

By

RachelKoning

WASHINGTON (CBS.MW) – Confident of economic moderation and no Federal Reserve rate hike this month, Treasury participants pushed the yield on a benchmark 10-year note on Thursday back to the four-month-low visited after a tame jobs report last week.

Traders are waiting for two top-tier numbers on Friday: July retail sales and July producer prices. After more comforting inflation signs in the Fed’s Beige Book report Wednesday, the fixed-income market was pricing itself for tame reports to end the week and perhaps seal the near-term fate of the already near-decade-high Fed target at 6.5 percent. View Economic Preview, economic calendar and forecasts and historical economic data.

The 10-year Treasury note rose 11/32 and was priced at 99 30/32. Its yield ($TNX: news, msgs) hit 5.76 percent, a level not seen since early April.

Further down the yield curve, the 5-year note was up 5/32, yielding 5.98 percent, while the interest-rate-sensitive 2-year note was up 1/32 at 6.15 percent. Yields in this sector of the curve are hovering near their lowest marks since late December 1999.

Even the 30-year bond, which spent most of the day in the negative, saw a delayed bounce after $5 billion in new long-dated paper was sold. Thursday’s auction drew fair demand with a bid-to-cover ratio of 3.71. But the sale brought only a skimpy $15 million in non-competitive – or retail – bids. Analysts had questioned investor interest given such low yields. The high yield of 5.697 percent awarded in the auction was the lowest since 5.298 percent on February 16, 1999.

But the small size of the auction was easily absorbed in the marketplace and attention quickly turned back to favorable economic news which has strengthened the argument for no Federal Reserve interest-rate hike.

Slim chance

The combination of a tame employment report Friday, an equally encouraging productivity report Tuesday and a Beige Book void of hawkish surprises augurs for no change to interest-rate policy when the Federal Reserve meets on Aug. 22, most credit market participants believe.

The implied yield on a September Federal funds futures contract is at 6.53 percent, barely above the central bank’s actual target. That means almost no one in the market expects the Fed to move. Further, a December contract is trading only marginally higher, at 5.58 percent, indicative of doubts for a rate hike even later in the year.

Of note, San Francisco Federal Reserve Bank President Robert Parry did sound a more cautionary note on Thursday when he told local business leaders in California's Silicon Valley that there is some risk the cooling factors are temporary. Parry pointed out 5.2-percent gross domestic product growth in the second quarter was still robust even if allowing for temporary factors like inventory stockpiling and government outlays.

Coming to market

Elsewhere, consumer goods giant Unilever Plc (UL: news, msgs) sold about $7.4 billion of bonds, the third largest corporate bond sale of the year, to partially fund its purchase of U.S. food maker Bestfoods.

In the currency arena, the dollar recovered against the yen ahead of the Bank of Japan's interest-rate decision Friday, which is expected to bring an end to the zero-interest rate policy that has been in effect since Feb.1999. However, a wide gap remains between Japanese government officials -- who want to keep rates at rock bottom to keep the country's still feeble recovery going -- and the central bank, which believes a self-sustaining economic recovery is underway and wants the country's rate regime to return to normalcy.

In the commodity market, September crude extended Thursday's gains, rising 80 cents to $31.15. Crude cracked the $31 barrier for the first time since June 30 after rallying $1.23 on Wednesday. Another drop in crude oil supplies reported by the American Petroleum Institute late Tuesday was behind the upward jolt over the past couple of trading sessions. Meanwhile, the Bridge CRB index added 0.79 to 219.48.

Also propelling oil prices Thursday was news that Kuwait had mobilized part of its army in response to threats made by Iraqi President Saddam Hussein, which investors fear could impact oil exports from the two countries. See full story.

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